Shell logs $7.4 billion loss as oil price slump and write-downs sink profits

Shell logs $7.4 billion loss as oil price slump and write-downs sink profits

Royal Dutch Shell has reported weak third quarter earnings, hurt by a triple whammy of low oil prices and losses related to suspended projects in the Arctic and Canadian oil sands.

The oil giant took a staggering $7.9 billion in write-offs, including $2.6 billion for the dry hole drilled in Alaska’s Arctic waters, $2 billion related to the suspension of the Carmon Creek oil sands project and $3.7 billion due to lower oil and gas price forecasts, including $2.3 billion related to shale oil properties in the United States.

But Royal Dutch Shell CEO Ben Van Beurden said in a third quarter earnings call that his company has not changed plans to make a final investment decision in 2016 on its LNG Canada project in Kitimat.

Shell reported a third quarter loss of $7.4 billion. It is taking massive impairments on the Carmon Creek oil sands project in Alberta and an offshore oil exploration project in Alaska, both of which Shell has shelved.

“The project just does not generate suitable returns,” Van Beurden said of the Alberta project.

While low oil prices make it more challenging for the company to continue to pour billions into new projects, Van Beurden said the company does not use current oil and gas prices as a management tool but bases its decision on long-term fundamentals, and for LNG, it is still a profitable business.

“You have to look at the returns of this business over the entire cycle, and I think over the entire cycle we are still expecting this to be a strong double digit return business,” he said.

Shell has planed to take final investments on a couple of large projects in 2016, including the LNG Canada project.

“We are in the middle of the FEED (front end engineering and design) for LNG Canada,” Van Beurden said.

“Of course if you look at gas prices in North America, you can imagine a downward adjustment is actually going to improve the economics of a project that fundamentally takes a margin between U.S. gas prices and North Asian gas prices, but at the same time that's not the only driver.”

Fundamentally, he said the project will need to be “ahead of the pack” in terms of costs and return on investment.

“It needs to deliver the most competitive LNG into the target market,” he said.

Shell’s LNG Canada plant and associated pipeline have already received all the necessary regulatory approvals. In May, Shell announced a FEED contract had been awarded to CFSW LNG Constructors for the planned LNG plant in Kitimat.

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